Although there is currently no federal statute imposing general data security standards on companies in all industries, the commission has brought numerous data security enforcement actions, claiming that it has broad enforcement authority under Section 5 of the FTC Act, which bars “unfair or deceptive acts or practices in or affecting commerce.” Many such enforcement actions, including those discussed below, stem from investigations following data breaches.

Few companies have challenged the FTC’s authority to enforce Section 5 of the FTC Act, and virtually all prior enforcement actions have settled before any significant litigation activity. However, FTC v. Wyndham Worldwide Corporation, a high-stakes legal battle in which Wyndham Hotels was bold enough to mount such a challenge, may provide guidance on the scope of this authority.

In June 2012—in what Wyndham calls “unprecedented litigation”—the FTC filed a complaint against Wyndham, charging that it misrepresented its information-security measures and repeatedly failed to safeguard consumers’ personal information, which resulted in the compromise of several hundred thousand consumers’ payment card data and a $10.6 million loss due to fraud. The commission alleged that Wyndham failed to maintain adequate information-security measures, including employing firewalls, configuring software appropriately, implementing adequate information security policies and procedures, remedying known security vulnerabilities, detecting and preventing unauthorized access to its network and following proper incident response procedures.

Wyndham filed a motion to dismiss, arguing the commission has no authority to regulate data security under the “unfairness” prong of Section 5, which empowers the commission to regulate acts or practices that cause “substantial injury to consumers” but is silent on data security. Wyndham contended the commission has publicly acknowledged that it lacks authority over data security, repeatedly asking Congress to enact legislation giving it such authority—yet Congress has instead enacted legislation applicable in specific, limited contexts; e.g., HIPAA, COPPA, FCRA, GLBA, none of which authorize the action against Wyndham. The FTC replied that the FTC Act is deliberately broad because it was intended to protect consumers from “unanticipated, unenumerated threats,” and courts have upheld a wide variety of uses of its unfairness provision, including for online check drafting and delivery, sale of telephone records and unsafe farm equipment.

In November 2013, Judge Esther Salas of the U.S. District Court for the District of New Jersey heard oral arguments on the motion to dismiss. Wyndham’s counsel argued that the commission’s role in the data security area is limited because Congress has only bestowed it with powers over targeted issues; e.g., children’s online privacy and financial institutions’ privacy protections, and further, the commission has never given businesses notice about its data security expectations through regulations or formal guidance. The commission contended in response that Congress’ silence on the agency’s broader authority does not negate this authority; the commission has issued guidelines for businesses on data security practices, and Wyndham failed to comply with even these “rudimentary guidelines.”

Judge Salas, perhaps realizing that a ruling for Wyndham would severely undermine the commission’s authority going forward, expressed skepticism regarding Wyndham’s arguments during the hearing, directing most of her inquiries to its counsel. A ruling is expected in the coming weeks.

Wyndham is not the only company to challenge the FTC’s authority to regulate data security under Section 5 of the FTC Act following a breach. A recent enforcement action involving a clinical testing company based in Atlanta, GA, FTC v. LabMD, Inc., raises similar issues. In August 2013, the commission filed a complaint against LabMD alleging that sensitive personal information of 9,300 individuals was exposed on a public file-sharing network for several years due to LabMD’s security failures, which led identity theft of some of the individuals. The commission claimed that LabMD failed to maintain a comprehensive data security program, use readily available measures to identify reasonably foreseeable information security risks, keep employees’ access of personal information on a need-to-know basis and adequately train employees on information security.

In November 2013, LabMD filed a motion to dismiss, arguing that the commission lacks Section 5 “unfairness” authority to regulate patient information data security practices because Congress authorized the Department of Health and Human Services (HHS), rather than the FTC, to regulate such practices; Congress has not given the FTC the plenary power to regulate data security through its “unfairness” authority, and the commission failed to provide fair notice of the necessary data security practices. As a clinical laboratory testing company providing its physician-customers with cancer diagnoses, LabMD explained, its patient information practices are regulated under HIPAA, which it has never been accused of violating. Shortly thereafter, the FTC filed a response, arguing that it is authorized to protect consumers from unfair data security practices; it has concurrent jurisdiction with HHS to protect health information security, and it has provided sufficient notice of its “reasonableness” data security standard.

In January, the commission issued a comprehensive order denying LabMD’s motion and concluding:

Congress delegated broad authority to the commission to regulate “unfair acts or practices” under Section 5, including those of healthcare providers and other HIPAA-covered entities;

Federal courts have found a wide range of acts or practices to be “unfair” under this standard;

Nothing in HIPAA or any other statute negates the commission’s enforcement authority, and, in fact, HIPAA’s requirements are consistent with those of the commission.

Shortly after the commission denied LabMD’s motion to dismiss, LabMD announced that it is winding down its operations due to the FTC’s actions and “abuse of power,” which forced it to endure a four-year investigation and administrative suit, despite the lack of any alleged HIPAA violation. Previously filed federal court cases requesting review of the FTC’s actions were subsequently dismissed and withdrawn. Thus, LabMD’s attempted challenge of the FTC’s authority has been unsuccessful thus far.

Practical Implications

Many companies today have large amounts of data, which has become increasingly valuable and important to their business operations—so much so that, as we plunge further into the age of Big Data, data has become “the new oil.” But the use of such data today comes with concurrent risks and obligations. Large data breaches, like the Wyndham and LabMD breaches, make news headlines and often invite regulatory scrutiny, even for companies that are themselves victims of hackers. In fact, the recent Target breach, which was one of the largest breaches in history, affecting as many as 110 million consumers, led to FTC and state attorneys general investigations, Senate hearings and nearly 70 class-action lawsuits from customers and banks.

According to the testimony of FTC Chairwoman Edith Ramirez at a hearing on “Privacy in the Digital Age: Preventing Data Breaches and Combating Cybercrime” before the U.S. Senate Judiciary Committee in February, the commission “does not require perfect security, and the fact that a breach occurred does not mean that a company has violated the law.” Instead, the commission’s approach under Section 5 of the FTC Act examines the “reasonableness” of a company’s data security measures, including the sensitivity and volume of consumer information the company holds, the size and complexity of its data operations and the cost of available tools to improve security and reduce vulnerabilities.

Although the commission has repeatedly urged Congress to enact federal data security legislation that would give it rulemaking authority in this area, there are currently no regulations setting forth the requirements necessary to meet the commission’s reasonableness standard. The commission, however, has explained in educational materials and guides that a sound data security program should:

Take Stock: Know what consumer information you have, along with what employees and vendors have access to it;

Scale Down: Limit the information you collect and retain based on legitimate business needs to avoid unauthorized access to needless data;

In light of the rising number of reported data breaches and associated identity theft concerns, data security will remain a top priority for the commission in 2014 and beyond. Although the scope of the commission’s authority over data security remains unresolved pending the ruling in FTC v. Wyndham, its recent FTC v. LabMD order makes clear its intent to exercise broad enforcement authority, even against HIPAA-covered entities. Accordingly, companies in all industries are well-advised to establish a data security program in compliance with the steps above to mitigate the risks of data breaches and regulatory enforcement actions.

Written By

Corey Dennis, CIPP/US

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